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To my last posts about this topic (http://mises.org/Community/forums/t/6950.aspx and http://mises.org/Community/forums/t/6952.aspx) I didn’t really receive any adequate responses to my question (not saying the responses were bad, but I just didn’t understand them or no one responded to them). So I guess the best solution is to word it in a different way. I’ll end my talk about the previous posts and look like I’m starting all over again
I am terribly confused on the Austrian meaning of saving. Some people say its differed consumption, while other people make it out to be more complex. For example, in this article(http://www.brookesnews.com/053101savings.html), Gerard Jackson says
Most economists define savings as deferred consumption. But this is a very misleading definition that confuses the demand to hold cash with savings. To the Austrian school of economics savings is a process that defers present consumption in favour of future consumption by expanding the capital structure. This definition clearly excludes cash balances.
Using the Austrian definition we see that “cash flow improvements from realized gains on equities” cannot in themselves be defined as savings. To be savings they must be invested.
This is my opinion makes sense. However other places I look give it the meaning of simply differed consumption, or relinquishment/postponement of consumption, which can also include hoarding/deposit banking and such. This seems vague to me. Since I want to try to keep this brief I won’t go on looking for quotes and such and leave that “side” as that. So in order to ease my confusion, how about a scenario J? (This scenario takes place in a world of full reserves, meaning deposit banking/loan banking)
John works at McDonalds every week for 50 dollars a week. Every week he gets a paycheck. Excluding everything else (house etc), John spends 40 dollars a week on food. He has 10 dollars left. With this, John can either A) Buy more consumer goods, B) put the 10 dollars in a deposit bank (meaning, such as Huerto de Soto describes in Money, Bank Credit, and Economic Cycles, he pays a fee to the depositary for safekeeping and has access to it at all times) or C) Invest with it, either using the money to make his own capital good or loaning it out through a loan bank.
So my real question is: Are choices B) and C) considered saving? To me they seem like two separate entities that do two different things to the economy, and according to Gerard Jackson from his quote choice B) is excluded (Deposit banking meanings “cash balances” or “hoarding”-correct?)
So, if only Choice C) represents saving in the Austrian sense, then for example, If John was to put 10 dollars a week in his deposit bank account in order to accumulate enough money to buy a bicycle (which costs 50 dollars), then there is no saving correct? Likewise if John was to do the same thing but instead of a 50 dollar bicycle he was to buy a 50 dollar stock of McDonalds, then the saving would only happen when he buys the stock and not simply putting it in his account correct?
However, if both choice B) and choice C) are considered saving in the Austrian sense, then I sense a problem. John utilizing choice C) expands the productive structure, choice B) does not. For example, in the Austrian Business Cycle Theory, how can choice B) be included in the pool of savings Austrians talk about (the one which investment exceeds through credit expansion?) The pool of savings which finances capital growth can come only from loans (If we strictly limit us in the banking business), not deposits.
For example, if both of those are considered saving, then if Individuals save but don’t invest and put all of their money in their deposit bank, then there will be no more loans available to business, meaning the pool of saving has not increased at all.
Thank you so much to the person who answers this for me. I hope I have clearly made my point and believe it to be something many people are confused on (as I see two different sides). I hope that my question is not too long, and if someone would like me to elaborate then I will
John Brown
I don't know whether to say that I'm happy that this many people responded or upset that it seems to be a confusion between people.
you could comment on the posts directly? the confusion may dissapear.
it seems jimmy and i agree, and possibly giles too, though i can't say that with as much confidence
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
I think the article is wrong. Saving is not deferred consumption in favor of future consumption by expanding the capital structure. That is investment. Savings is deferred consumption only. Savings is a broader term than investment, and includes both investment and hoarding.. So in your example, both B and C are savings, but only C is investment.
Zlatko: Savings is deferred consumption only. Savings is a broader term than investment, and includes both investment and hoarding..
But does hoarding entail deferred consumption? I'd say no.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
GilesStratton:But does hoarding entail deferred consumption? I'd say no.
it is a matter clarified by the context of the scenario being considered.
if i get hold of a salted fish and dont eat it till the next week, i hoard a fish for a week, i have deferred consumption for a week; i saved for a week, then i consumed the fish at the end of the week.
if i then consider 'what did i do this week', i might say, 'i consumed a fish' and i might also say 'i did not save any fish this week'. and the fact of my saving doesnt get mentioned or is overlooked. my story has been simplified. often in writing a difficult economic tract, i might choose to use the latter simplification, to give proper emphasis and simplicity to the matters i really do wish to discuss. but i think the more detailed interpretation can always be fed back in.
What on earth is being "consumed" when someone puts cash under their mattress? I know you suggested above that the money itself is being consumed, but I simply cannot agree on this point. The utility of money is precisely its exchange value and until such a time as the money is spent, it is not consumed. Money is not consumed by keeping it in one's wallet any more than ice cream is consumed by keeping it in the freezer.
See my post above for an explanation as to how hoarding results in additional savings being available in the economy (which make themselves available to others through a lowering of the general price level)...
In order to hoard one first has to produce something and then to abstain from any equivallent consumption. This is the very essence of the Austrian definition of savings - deferred consumption. Because the hoarder does not give any money to anyone else in no way detracts from the fact that he has added real savings to the economy - which will find their way into the hands of other market participants in one way or another (in the short term at least - perhaps in the long term they'll find their way back into the hands of the hoarder... but the same could be said of money invested in stocks or bonds by investors, when those investors close their positions).
The main difference between hoarding and investing is that in the later case the recipients of the savings are easier to see and can be much more clearly identified.
jimmy:The utility of money is precisely its exchange value and until such a time as the money is spent, it is not consumed. Money is not consumed by keeping it in one's wallet any more than ice cream is consumed by keeping it in the freezer.
Well, I believe there has been some contention within the Austrian school as to whether this is the case or not, I believe you're siding with Hayek and Wicksell. I think you're not correctly understanding the subjective element of consumption. Let me ask you this, if I have a car and nowhere to go, am I saving by not driving it around the block countless times? It seems somewhat obvious to me that the answer is no (perhaps you might disagree). All consumption means is that I am using a good to acheive an end I have ranked highly, in the terms of money how can it not be said that I am consuming it due to the fact that my holding it allows me to acheive an end I desire highly, say security. I agree that this sounds a little bit off and I'm not entirely sure that it is correct, but I don't see any obviously fallacious reasoning.
In the ice cream example, provided you subjectively assess that you will eat the ice cream whenever you are hungry, it cannot be said to be the same good as the ice when you happen to be hungry. So how can it be seen as deferred consumption?
jimmy:See my post above for an explanation as to how hoarding results in additional savings being available in the economy (which make themselves available to others through a lowering of the general price level)...
Right, but this doesn't add additional resources to the economy as savings/ investment does. When an individual saves and consequently invests the money they are taking resources that would have otherwise gone to consumption towards future consumption. On the other hand the drop in prices that occurs when individiual hoard is exactly offset by the increase in cash balances.
jimmy:In order to hoard one first has to produce something and then to abstain from any equivallent consumption. This is the very essence of the Austrian definition of savings - deferred consumption.
But that's exactly what I'm challenging, the idea that it does count as savings. The interest rate is the price that coordinates savings and investment, in other words, it is the price of future goods relative to present goods. Conversely there exists the ratio between money spent and money in individuals cash balances: the demand for money.
Any other points in your post have been answered above.
(I posted this in both threads in case someone isn't following the other-sorry for "spam")
I still don't know what to exactly say as to whether saving is "deposit banking/loan banking" or "loan banking".
Perhaps an easier way to go about this would be to post some quotes.
Here is a quote from Murray Rothbard's America's Great Depression (starting on page 38)
Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other. Aside from bank credit, investments can come from no other source than savings (and we have seen what happens when investments are financed by bank credit). Not only consumers save directly, but also consumers in their capacity as independent businessmen or as owners of corporations. But can’t savings be “hoarded”? This, however, is an artificial and misleading way of putting the matter. Consider a man’s possible allocation of his monetary assets: He can (1) spend money on consumption; (2) spend on investment; (3) add to cash balance or subtract from previous cash balance. This is the sum of his alternatives. The Keynesians assume, most contrivedly, that he first decides how much to consume or not, calling this “not-consumption” saving, and then decides how much to invest and how much to “leak” into hoards. (This, of course, is neo-Keynesianism rather than pure Keynesian orthodoxy, which banishes hoarding from the living room, while readmitting it by the back door.) This is a highly artificial approach and confirms Sir Dennis Robertson’s charge that the Keynesians are incapable of “visualizing more than two margins at once.”2 Clearly, our individual decides at one and the same stroke about allocating his income in the three different channels. Furthermore, he allocates between the various categories on the basis of two embracing utilities: his time preferences decide his allocation between consumption and investment (between spending on present vs. future consumption); his utility of money decides how much he will keep in his cash balance. In order to invest resources in the future, he must restrict his consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent. The two terms may be used almost interchangeably.
And here are two quotes from Murray Rothbard's What Has Government Done to Our Money? and The Case for a 100 Percent Gold Dollar (Starting on Page 134-135 and then 162)
In one sense, 100 percent banking is now easier to establish than it was in 1962. In my original essay, I called upon the banks to start issuing debentures of varying maturities, which could be purchased by the public and serve as productive channels for genuine savings which would neither be fraudulent nor inflationary. Instead of depositors each believing that they have a total, say, of $1 billion of deposits, while they are all laying claim to only $100 million of reserves, money would be saved and loaned to a bank for a definite term, the bank then relending these savings at an interest differential, and repaying the loan when it becomes due.
(Page 162)
Another argument holds that the fact that notes and deposits are redeemable on demand is only a kind of accident; that these are merely credit transactions. The depositors or noteholders are simply lending money to the banks, which in turn act as their agents to channel the money to business firms. And why repress productive credit? Mises has shown, however, the crucial difference between a credit transaction and a claim transaction; credit always involves the purchase of a future good by the creditor in exchange for a present good (money). The creditor gives up a present good in exchange for an IOU for a good coming to him in the future. But a claim—and bank notes or deposits are claims to money—does not involve the creditor’s relinquishing any of the present good. On the contrary the noteholder or deposit-holder still retains his money (the present good) because he has a claim to it, a warehouse receipt, which he can redeem at any time he desires.[25] This is the nub of the problem, and this is why fractional-reserve banking creates new money while other credit agencies do not—for warehouse receipts or claims to money function on the market as equivalent to standard money itself.
To those who persist in believing that the bulk of bank deposits are really saved funds voluntarily left with the banks to invest for savers, and are not just kept as monetary cash balances, I would like to lay down this challenge: If what you say is true, why not agree to alter the banking structure to change these deposits to debentures of varying maturities? A shift from uncovered deposits to debentures will of course mean an enormous drop in the supply of money; but if these deposits are simply another form of credit, then the depositors should not object and we 100-percent theorists will be satisfied. The purchase of a debenture will, furthermore, be a genuine saving and investment of existing money, rather than an unsound increase in the money supply.
Now these seem to agree with Giles' view on saving
Of course perplexingly enough when you look in the Index of the book you find that the word Savings is listed on Page 43. There is no word "savings" on page 43, but instead his talk about Hoarding. Cruel trick or typo? I don't know.
But then....
In Henry Hazlitt's Economics in One Lesson (Page 167) he says
The enemies of saving are not through. They begin by drawing a distinction, which is proper enough, between “savings” and “investment.” But then they start to talk as if the two were independent variables and as if it were merely an accident that they should ever equal each other. These writers paint a portentous picture. On the one side are savers automatically, pointlessly, stupidly continuing to save; on the other side are limited “investment opportunities” that cannot absorb this saving. The result, alas, is stagnation. The only solution, they declare, is for the government to expropriate these stupid and harmful savings and to invent its own projects, even if these are only useless ditches or pyramids, to use up the money and provide employment.
There is so much that is false in this picture and “solution” that we can here point only to some of the main fallacies. Savings can exceed investment only by the amounts that are actually hoarded in cash.’ Few people nowadays, in a modern industrial community, hoard coins and bills in stockings or under mattresses. To the small extent that this may occur, it has already been reflected in the production plans of business and in the price level. It is not ordinarily even cumulative: dishoarding, as eccentric recluses die and their hoards are discovered and dissipated, probably offsets new hoarding. In fact, the whole amount involved is probably insignificant in its effect on business activity.
* Many of the differences between economists in the diverse views now expressed on this subject are merely the result of differences in definition. Savings and investment may be so defined as to be identical, and therefore necessarily equal. Here I am choosing to define savings in terms of money and investment in terms of goods. This corresponds roughly with the common use of the words, which is, however, not consistent.
Of course the confusion continues.... In Robert Murphy's Human Action Study Guide (page 178) he says
Before lengthening the period of production, a person must first engage in saving, i.e; consuming less than what is possible. An obvious example is the stockpiling of consumer goods for the workers who will be devoted to a project (such as construction of a bridge) that will not yield direct benefits for several years
Now I’M REALLY confused lol.
Perhaps a Mises staff or Austrian Professor could sort this out.
(Sorry for the length)
GilesStratton:In the ice cream example, provided you subjectively assess that you will eat the ice cream whenever you are hungry, it cannot be said to be the same good as the ice when you happen to be hungry. So how can it be seen as deferred consumption?
you save the icecream in your fridge, investing it,
over time, it is transformed from an inferior product, icrecream-when-you-are-not-hungry-and-not-in-the-mood-for-icecream,
and eventually
your investment pays off and it becomes icecream-when-you-are-in-the-mood-to-enjoy-icecream, you then consume it.
so in that interval of time when its in your fridge, it is better to describe it as savings, than to use an indefinite and unscientific term, such as 'hoarding'
So your argument hinges on the fact that the term in question is unscientific? Well, fine, let's use "increasing ones cash balance" as I suggested to Juan. You're begging the question since you begin your post by saying "you save the ice cream in your fridge", well that's what we're trying to establish. If you say that he is saving the ice cream then yes obviously he is saving it. On the other hand, if he has it in the fridge (or the freezer, as it were) for any time he wishes to eat it when it gives him most pleasure, it is consumption, it is satisfying his desire to have ice cream in the fridge, not his future desire to eat ice cream.
Let me put it another way, if individuals cash balances do constitute savings why don't they loan them and earn interest? Unless, they want immediate availability of the cash, in which case it isn't savings.
your argument amounts that all investment/savings is consumption.
GilesStratton:if he has it in the fridge (or the freezer, as it were) for any time he wishes to eat it when it gives him most pleasure, it is consumption, it is satisfying his desire to have ice cream in the fridge, not his future desire to eat ice cream.
if he has a gold bar, in the locked safe (fridge) for any time he wants to spend it(eat), when it suits his ends, it is consumption, it is satisfying his desire to have money in the safe, not his future desire to spend money.
but why does he want it in the safe, so he can spend it in the future perhaps?
nirgrahamUK:your argument amounts that all investment/savings is consumption.
If that's so I'm more than willing to amend my views, I'm just going to require more than an assertion to believe that this is the case.
nirgrahamUK:but why does he want it in the safe, so he can spend it in the future perhaps?
If that's so then it is savings. If he merely wants it in a safe for protection then it is consumption, where's the issue?
GilesStratton: If he merely wants it in a safe for protection then it is consumption, where's the issue?
we accept the possibility that he may simply like some material part of the universe to be in some particular arrangement, as you say we can call that consumption. you say that he merely wants it in a safe, why then add 'protection', ? regardless, this is quite the aside!
i think the issue is that you said that scenario B was not savings, though the agent in B does not specify whether he wants to have money put away for future spending, or whether he just has a fetish for squirelling money into corners *for its own sake*.
perhaps i assumed too much, thinking that him putting away 10$ into a deposit bank (making a bailment), is because he imagines that in the future, he might rely on the purchasing power of the accumulated funds (savings!) and consume goods later. but if he is doing it out of instinct so its not a rational action at all, or if he is doing it merely for the pleasure of seeing the numbers on his bank balance rise, then you may have stated the correct position.
GilesStratton:Right, but this doesn't add additional resources to the economy as savings/ investment does.
I'm beginning to suspect that our argument is largely semantic. You have started with, as the definition for savings, any surplus production which is put towards the purpose of investment (and thus increased future consumption) whereas I have started, as the definition for savings, any surplus production more generally... In your mind then, the only thing that can constitute savings is stuff that is used to increase future production (i.e. you equate savings with investment) whereas in my mind there are three different things you can do with savings: consume them, invest them or keep them on hand (typically in the form of cash balances).
None the less, I still take issue with the statement that I quote above, that the hoarder does not add any additional resources to the economy. Take the example given by the OP of the McDonalds worker. This worker MUST produce hamburgers and MUST add hamburgers to the economy BEFORE he is in a position to put cash in his wallet or under his mattress or whatever. My assertion is that these hamburgers are the real savings that should be considered - the money (John's $10) is completely surpurfluous from an economic point of view - the only reason the $10 even exists is to facilitate trade through indirect exchange... ultimately what each of the actors in the economy (using that $10, along with many other dollars) are interested in consuming is real goods that satisfy needs directly.
Yes, money could be said to be serving various needs indirectly, by sitting in someone's wallet, and thus since consumption is the satisfaction of needs then money could be said to be "consumed" by the act of leaving it in one's wallet... but that does not in any way negate the real hamburger savings of McDonalds workers. The only thing that McDonalrds workers do not add to the economy, in hoarding, is dollar notes... and thus the only goods that they prevent other actors in the econmy from consuming are dollar notes (they prevent other actors in the economy from using these same dollar notes to add to their cash balances and get their own "woah I feel secure" vibe going on). And so they have not "defered consumption" of dollar notes, but they have "defered consumption" of hamburgers (the real savings concerned)... so there is still very real savings of the real goods concerned (hamburgers in this example, but it could equally be wood, steel, accounting services etc.).
If you would deny this then how exactly are you defining savings? What is the difference between savings and investment in your view? It seems to me that you don't think there is any place for the concept of savings as distinguishable from investment and that you would dispense with the concept of savings entirely. In your view, the economy can be discussed without any reference to savings whatsoever - all we need discuss is consumption and investment - there can be no other form of activity... is this what you're saying? If not then, once again, what distinguishes savings from investment in your mind?
I would hold that in addition to consumption and investment there is a third activity, which is the act of accumulating resources and keeping them aside against future uncertainties. We could hoard keggs of beer, wood piles, flour and other physical resources in our back yards but most people opt to keep these "emergency" stockpiles in more liquid forms that allow them to insure against a greater variety of uncertainties. Keynes would refer to this as hoarding - I would group hoarding and investment under the umbrella of savings since, to me, savings is deferred consumption (regardless of what happens to the surplus goods that result from such deferred consumption).
It seems to me that if you would disagree with this then you've left no word to describe that thing that I'm talking about (which encompasses both hoarding and investment) - the general phenomenon of simultaneously producing without consuming and, thus, contributing an excess of goods and services to the economy, quite irrespective of whether the money received for the act of production are invested (and thus given directly to another actor in the economy) or whether these are instead stashed under the mattress (resulting in the indirect transfer of these savings to other actors in the economy through a general lowering of the price level). What word do you think we should use for this? It seems like you have "investment" to describe everything you intend to mean by savings and hoarding to describe the other specific form of deferred consumption... so the word "savings" is just sitting there idle, waiting for a good home.
Okay, thanks for all of the replies guys. To ease my own confusion (lol), IN SUMMATION: the Austrian view of saving is deferred consumption right?
So, (going back to the original question), if John works at McDonalds and earns 50 dollars, and spends 40 dollars on food, but then refrains from using the 10 dollars and puts 5 in a McDonalds stock and 5 in his deposit warehouse/hoard/cash balance (he is not planning on buying anything now but just putting it there for the occasion he can buy something he likes), both of those are saving correct? Going off of this, does that mean that all of the goods that I have in my house (such as food, change, medicine, etc) that I bought but are not using right now means I am saving those items right?
I understand how the 5 dollars of McDonald’s stock helps the economy. It gives them money and resources to invest and grow their company, and represents actual savings because it is relinquished. I am confused as to how the 5 dollars I put in my deposit warehouse/hoard/cash balance helps the economy in the same way as the 5 dollars put into McDonald’s stock helps it. I have “saved”, but in essence I have not relinquished any resources. The 5 dollars is still there waiting for me. This is why I’m confused between the Rothbard quotes and such where he says money put in a deposit bank really isn’t “savings” (see quotes above, it would help me greatly if someone could explain this).
And if putting the 5 dollars in my deposit warehouse/cash balance/hoard equates to saving, then why does Rothbard and others always say saving and investment are equal? (“This is restricting his savings, so saving and investment are always equivalent”). Going off B) and C) being saving, this statement is impossible. Everyone will always have cash balances, so they will never be equal. Ever.
Am I missing something? I would be extremely gratefully to someone who can answer my questions.
Thanks as usual.
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